Microsoft takes aim at Google

By Kimberly Guest for Microsoft

Johannesburg, 04 Feb 2008

Microsoft's $44.6 billion bid for Yahoo is aimed at improving competition in Internet search and online advertising, says Microsoft's general counsel, Brad Smith.

"The combination of Microsoft and Yahoo will create a more competitive marketplace by establishing a compelling number two competitor for Internet search and online advertising. The alternative scenarios only lead to less competition on the Internet," he says.

On Friday, Microsoft revealed it had made a proposal to Yahoo's board of directors to acquire all outstanding shares in the company at $31 per share. This offer represents a 62% premium on Yahoo's Thursday closing price.

Yahoo shareholders could opt to take the cash or 0.9509 of a Microsoft common stock share, it said.

About competition

In an announcement to shareholders on Friday, Microsoft noted the online advertising market was growing at a very fast pace, "from over $40 billion in 2007 to nearly $80 billion by 2010". The resulting benefits of scale - along with the associated capital costs for advertising platform providers - make this a time of industry consolidation and convergence, it said.

"Today, this market is increasingly dominated by one player. Together, Microsoft and Yahoo can offer a competitive choice while better fulfilling the needs of customers and partners," Microsoft added.

Yesterday, Smith named Google as the dominant player.

"Today, Google is the dominant search engine and advertising company on the Web. Google has amassed about 75% of paid search revenue worldwide and its share continues to grow. According to published reports, Google currently has more than 65% search query share in the US and more than 85% in Europe. Microsoft and Yahoo, on the other hand, have roughly 30% combined in the US, and approximately 10% combined in Europe," he said.

In response, Google's senior VP of corporate development and chief legal officer, David Drummond, says: "Microsoft's hostile bid raises troubling questions. Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC?"

Second time lucky

Microsoft CEO Steve Ballmer's open letter to Yahoo's board of directors reveals this is not the first time the software giant has suggested a merger between the two players.

"In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected," he says.

Ballmer reveals he received a letter in February 2007 from Yahoo chairman Terry Semel saying the timing was not right to enter discussions around an acquisition.

"According to that letter, the principal reason for this view was the Yahoo board's confidence in the 'potential upside' if management successfully executed on a reformulated strategy based on certain operational initiatives and a significant organisational realignment. A year has gone by, and the competitive situation has not improved," Ballmer says.

Ballmer urged Yahoo's board to take the offer seriously, warning in a thinly veiled threat that Microsoft reserved the right to "pursue all necessary steps to ensure that Yahoo's shareholders are provided with the opportunity to realise the value inherent in [its] proposal".

Hours before Microsoft's announcement was made public, Yahoo announced Semel would step down with immediate effect.

Yahoo has since said its board will evaluate the unsolicited bid from Microsoft.

Microsoft's offer saw its share price close 6% down on Friday at $30.45. Yahoo gained 46% to close at $28.32. Google lost 8.58% off its share price to close at $515.90.